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Op-ed for Handelsblatt Newspaper ‘Economic policy under a continuing pandemic’ by the Governor of the Bank of Greece Yannis Stournaras

23/09/2020 - Articles & Interviews

Drawing on their experience from previous crises, notably the recent debt crisis, policy makers -- from the very early stages of the pandemic -- acted promptly, decisively and in a coordinated manner to support the European economy and provide the medical community time to develop appropriate antivirus vaccines.

The unprecedented policy support has limited the effects of the coronavirus pandemic on the economy. However, the pandemic has led to a reallocation of resources; the industries most affected by the pandemic are expected to shrink. Moreover, a resurgence of the pandemic might lead to a deeper recession and a more delayed recovery than initially expected. 

In order to help prevent such a development:

-           All available instruments and tools (fiscal, monetary, macroprudential) as well as productivity enhancing structural reforms should be used simultaneously. And phasing out of the support measures should be delayed until the recovery is well on track.

-           Common fiscal actions in Europe should continue, in view also of the differentiated fiscal space of EU member states. The creation of the Next Generation EU Fund should not be seen as a one-off development but as the beginning of a more coordinated and systemic policy response to a serious external symmetric shock with asymmetric disinflationary consequences on member states.

-           Funds should be primarily directed to productive investments, infrastructure, education, health, labor force training, new technologies and environmental priorities.

-           Special attention should be paid to increasing inequalities and the need to create a safety net for the most vulnerable citizens.

-           Regarding the banking system, the current crisis demands to accelerate the completion of the Banking Union, prioritizing the European Deposit Insurance Scheme (EDIS). It is also imperative to be able to tackle the next generation of non-performing exposures and to facilitate the flow of credit to the real economy.  This could involve the creation of Asset Management Companies, either at national or, preferably, at a pan-European level.

A premature withdrawal of the policy support could delay the recovery by generating a cliff effect, i.e., a sharp rise in insolvencies and bankruptcies, an increase in non-performing loans and in structural unemployment, and a decline in labor productivity as investment contracts on account of high uncertainty and weak economic prospects. These factors, should they occur, could lead to a situation of secular stagnation along with sustained deflationary pressures.

You may find here the published article in Handelsblatt.

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